DP
Debt & Yield Curvesbeginner

Commercial Paper

Commercial paper (CP) is an unsecured short-term promissory note issued by large, creditworthy corporations and financial institutions to fund working capital and short-term liabilities. US CP maturities cap at 270 days to avoid SEC registration under section 3(a)(3) of the Securities Act. Issuers typically need a short-term credit rating of A-1, P-1, or F1 to access the market at competitive yields. CP is zero-coupon, sold at a discount to face value, and predominantly held by money market funds.

Why it matters

Commercial paper is the corporate world's version of a bank bill. Apple or BHP needs to bridge a 60-day cash gap between paying suppliers and collecting receivables. Borrowing from a bank costs a margin over the bank's own funding rate. Issuing CP directly to a money market fund cuts the bank out and saves the margin, but only if the issuer's credit is highly rated. Below investment grade, the CP market closes quickly. That is why the GFC and the March 2020 dash for cash both started as CP market freezes.

Formulas

US commercial paper discount pricing
P=FV(1−r×d360)P = FV \left(1 - r \times \frac{d}{360}\right)
US CP follows the bank discount ACT/360 convention. rr is the quoted discount rate, dd is days to maturity.
Money market yield earned
y=FV−PP×360dy = \frac{FV - P}{P} \times \frac{360}{d}
Converts the discount-priced trade into an add-on yield comparable to other money market instruments. Equivalent ACT/365 yield multiplies by $365/360$.

Worked examples

Scenario

A US-rated A1/P1A1/P1 industrial issues 90-day commercial paper with face value US$50 million at a quoted discount rate of r=4.20%r = 4.20\%.

Solution

Price P = 50{,}000{,}000 \times (1 - 0.042 \times 90/360) = 50{,}000{,}000 \times 0.9895 = \text{US\}49{,}475{,}000$. The issuer receives US$49.475 million today and repays US$50 million at maturity. Cost of funds (money market yield) =(50−49.475)/49.475×360/90=4.244%= (50 - 49.475)/49.475 \times 360/90 = 4.244\%.

Scenario

An Australian major bank issues A$200 million of Euro Commercial Paper (ECP) in the offshore market at $4.35\%$ for 60 days to fund its trading book.

Solution

Using AUD simple interest convention P = 200{,}000{,}000/(1 + 0.0435 \times 60/365) = 200{,}000{,}000/1.007151 = \text{A\}198{,}580{,}000$. The bank pays A$1.42 million of interest for the 60-day bridge. CP usually undercuts the bank's own term wholesale funding cost by a few basis points.

Common mistakes

  • ✗Any company can issue commercial paper. In practice only highly rated issuers find buyers at attractive yields. The market is dominated by names rated A-1/P-1/F1. Investment-grade-but-not-top-tier issuers face wider spreads and rapid market closure during stress.
  • ✗Commercial paper is collateralised. It is unsecured. Backing is the issuer's general credit. Asset-backed commercial paper (ABCP) is a separate product backed by a pool of receivables, and its 2007 to 2008 collapse triggered the early phase of the global financial crisis.
  • ✗CP is a long-term funding tool. US Section 3(a)(3) exemption caps maturity at 270 days, and the typical issue is 30 to 90 days. CP is rolled over continuously, which creates rollover risk if markets freeze, as happened to Lehman and many ABCP conduits in 2008.

Revision bullets

  • •Unsecured corporate short-term IOU
  • •US maturity cap of 270 days under Section 3(a)(3)
  • •Issued by highly rated corporates and banks
  • •Priced as a discount instrument, zero-coupon
  • •Cheaper than bank loans for top-rated issuers
  • •Subject to rollover risk in stressed markets

Quick check

Commercial paper is best described as

Why is the commercial paper market highly sensitive to issuer credit quality?

Connected topics

Money MktMMF

In learning paths

Fixed Income & Rates Path

Sources

  1. Hull (2022), §4.1
    Hull, John C. Options, Futures, and Other Derivatives. 11th ed. Pearson, 2022. ISBN 978-0-13-693997-9.
    Overview of money market instruments including commercial paper and its discount pricing convention.
  2. Federal Reserve Commercial Paper data
    Board of Governors of the Federal Reserve System. Commercial Paper Rates and Outstanding Summary. Federal Reserve, ongoing release.
    Authoritative weekly data on US CP outstanding by issuer type and rating tier, used by money market participants for spread analysis.
  3. Federal Reserve CPFF technical Q&A
    Board of Governors of the Federal Reserve System. Commercial Paper Funding Facility. Federal Reserve, accessed 2026.
    Describes the 2008 and 2020 Fed interventions that backstopped the CP market when private buyers withdrew, illustrating rollover risk.
  4. RBA Bulletin (April 2025)
    Reserve Bank of Australia. Bank Funding in 2024. RBA Bulletin, April 2025.
    Documents Australian major banks' use of US and Euro commercial paper for offshore short-term wholesale funding.
  5. Fabozzi (2021), Ch. 12
    Fabozzi, Frank J. Bond Markets, Analysis, and Strategies. 10th ed. MIT Press, 2021. ISBN 978-0-262-04627-3.
    Detailed treatment of CP, ABCP, ratings tiers, and the role of liquidity backstops.
How to cite this page
Dr. Phil's Quant Lab. (2026). Commercial Paper. Derivatives Atlas. https://phucnguyenvan.com/concept/commercial-paper
← Back to the atlasSee in the network →